Interview, Part 2

Q : What's normal?A : You deduct special charges and cyclicality, and calculate normal sales, operating margins and dividend payouts. What has happened in Asia over the past 18 months has done more to ensure sustainable economic growth in the medium and long term than anything else could have. The creative destructionism that has come out of this bloodbath has been phenomenal. In places like Thailand and Korea, and to a lesser extent Hong Kong and Singapore, companies and countries have embraced reform. Even Indonesia is better off than it was a year or two ago. Malaysia is the odd man out.

Q : What's the big picture here?A : Korea already has had a big move. Elsewhere, Chinese Asians, who have a strong entrepreneurial streak, have made the correct, tough decisions in Hong Kong, Singapore and Thailand. Mainland China also will resume growth again, and sooner than many people think. Non-Chinese economies like Australia and New Zealand also will pick up. By the second half of 1999, Asia will be growing again. By mid-2000 it will be growing rapidly. All these international fund managers who are 75%-80% invested in Europe will rediscover Asia.

Q : Do you really think portfolio managers will likely take money out of the 25 or 50 biggest blue-chips in the euro zone and invest it in smaller capitalizations in Asia?A : Yes. You'll see them begin to reallocate. Maybe the locals will start pushing up regional share prices, but the big boys won't want to be left out. Valuations are too dirt-cheap, and Asia is a long-term growth story. As a result of a currency crisis that began in July 1997, many nations have done more to sustain their long-term economic viability than one could have anticipated.

This has been a cleansing crisis. It was a time-out when the team was beaten up and discouraged, and suddenly it learned how to play like the Green Bay Packers. Asia was a mid-level team that learned a lot in a hurry.

Many global strategists still say that Asia must clean up its act, must do this, that and the other thing. Guess what? You can say the same about Continental Europe. You have a new finance minister in Germany who talks like a 1960s Keynesian. French policy makers believe the solution to unemployment is to cut the work week. Europe will be eaten alive by Asia if it doesn't change.

Asia is vibrant. It adapts. It overcomes. It's able to get over things. Asia's knee-jerk policy reaction to a recession is to cut taxes and deregulate. Europe's knee-jerk is to increase taxes, increase government involvement in the economy, increase the welfare state. It's amazing to consider how France responds to a recession versus how Singapore does.

Q : Singapore says: We're cutting your wages for the greater good.A : Right. It will make them more competitive and more productive.

Q : Can there be a year or so where Europe keeps growing, and maybe grows faster, owing to opportunities in the euro zone?A : Opportunities in euroland and restructuring are the two things Europeans can hang their hats on. They already enjoyed a boom from an upward revaluation of the dollar. They will continue to milk the lower-interest-rate cow. That will help, but all the easy stuff has been done. Europe now needs to restructure both macroeconomically and microeconomically. In my opinion, the Asians are much more apt to restructure than the Europeans.

Q : What will happen to the dollar in 1999?A : Against Europe in general, it will be fairly stable. The reason is simple. The U.S. still is the best place for money to fly to, both long-term investment capital and short-term financial capital. This is a stable place with still-decent medium- and long-term growth opportunities. The stability and openness of our economy always has made it a destination for foreign investment. This will keep the dollar from imploding, as it did against the yen four years ago for the wrong reasons.

Q : Which were?A : In a rush to liquefy, Japanese investors were selling U.S. real estate and other assets and were bringing the money home. Traders saw a trend and jumped on it.

Q : From 112 to a dollar recently, where's the yen headed?A : Slightly weaker. If the yen rises to 100 again and stays there for any length of time, Japanese economic recovery would be severely damaged. Exports would suffer. I don't see this happening. At the same time, I don't see the yen imploding from here. Japan still runs a huge trade surplus. If, in fact, you begin to see stability in the Japanese economy, more portfolio money will flow there. This logically would help the yen.

Q : Okay, it's time to pick some stocks.A :
Unibanco
is the fourth-largest bank in Brazil. It trades in New York in ADR form. At 15 11/16 recently, it sold at 0.6% of book value. Loans are only 30% of assets, and they have a low loan-loss ratio. Brazilian government paper comprises the rest of assets.

Some bank acquisitions and mergers in Brazil have been done at two times book value, and there is some takeover talk. That would be icing on the cake, and the wrong reason to buy the stock. You buy it because Unibanco is a very blue chip, a well positioned, highly efficient generator of net income. The stock trades at four times normalized earnings. When Brazil is up and running again, those earnings could grow at 10%-15% a year.

Q : What's your target?A : Around two times book, or 55. It's a potential home run.

Q : Next.A : One of the great stories in Brazil has been the breakup of Telebras, the telecommunications giant, into 12 separate companies, the Baby Bras. We especially like the two Telesps. They supply the city and state of Sao Paulo with wireless and wireline services. We like both units. Both trade on the New York Stock Exchange in ADR form. At 20 1/2 recently, Telesp Celular trades at 4 1/2 to five times cash flow, which is a 60%-70% discount to its international peers. We see annual double-digit gains in both sales and earnings over the next five years. Some years could be 20%-30%.

Q : What else?A : We love Telemig Celular for the exact same reasons. It serves the state of Minas Gerais, which is steel and iron-ore country. The stock recently was 21 1/8 .

Q : What's next?A :
Bladex
-- the official name is Banco Latinoamericano de Exportaciones -- does trade financing throughout Latin America and trades on the Big Board. It's a gem.

Q : Standard & Poor's recently revised its outlook on Bladex to "stable" from "positive," but maintained its ratings.A : Bladex has extremely low loan losses that rarely exceed 1%-2%. It extends credit to other banks, not directly to importers or exporters. Say Citibank wants to issue a big letter of credit to a client, but that client's line of credit is used up. Citibank lays off the loan to Bladex, which carries it as a loan to Citibank Brazil. As long as Bladex does good credit analysis of other banks, its loans are very safe, low-risk and generally low-return. Their spreads are only 100-150 basis points. The stock, recently 17 7/16 on the Big Board, is down from a 52-week high of 44. It sells at five times current earnings, 4 1/2 times projected earnings, and yields 5.6%. Its dividend probably will go up, not down.

Q : Moving right along.A :
Giordano International
is a Hong Kong-based pan-Asian retailer of basic casual wear. A combination of regional currency devaluations and a recession in Hong Kong hurt them last year. It lost money at home but made money elsewhere, and is expected to report consolidated 1998 profits of HK eight cents a share. We expect a 25% gain in EPS this year. Their balance sheet still is in a net cash position. They used some of this money to buy back shares. From HK$8 in December 1996, the stock fell to 87 cents last August. Recently it was 1.37. We think it's worth 4.50 in 12-18 months.

Q : Another one, please.A :
Fernz
, a New Zealand company, once was a fertilizer maker. Now it sells more complicated compounds like pesticides and insecticides. It has posted double-digit earnings growth over the past 10 years by a combination of internal growth and acquisitions. At NZ$5.95 a share recently, it sells at 13 times estimated 1999 earnings and yields almost 5%.

Q : Let's switch to Europe.A :
Tomkins
, a mini-conglomerate, is one of our favorite U.K. companies. Its two biggest holdings are a baking company and Gates Rubber, which makes belts and seals, that sort of thing. At 266 pence a share, Tomkins sells at 11 times earnings and yields 5%. It generates free cash flow of 300-400 million a year, a sum equal to just under 10% of its stock market capitalization. With this cash it has bought back stock, increased its dividend and made acquisitions from which it extracted higher operating margins. Our target is 450 pence.

Q : What's next?A : I have long been a holder of and a proponent of two U.K. advertising agencies,
Saatchi & Saatchi
and
Cordiant Communications
. Until late 1997 they were under one corporate roof, but they split into two separate companies. In my view, they are two of the cheapest media plays in the world, both incredibly undervalued.

Q : Why? Is advertising picking up?A : It is for them. They both are getting additional business from existing clients, and both had spectacular successes in 1998. For example, Cordiant added over $650 million in new billings. This can basically equate to 15% growth in revenues, and the stock price doesn't yet reflect it.

Q : Which class of stock do you own, the common that trades in London, or the ADRs?A : The common. Cordiant recently traded at 119 pence a share, Saatchi & Saatchi at 123.5. Both are worth in excess of 200 within 12 months.

Q : If there's an economic slowdown in the U.K. and the U.S., won't advertising outlays decrease?A : The European economy really has changed. With all the privatizations and mergers that have occurred, European advertising billings likely will grow faster than gross domestic product. All else being equal, there will be more spending on media, broadcasting, print, etc. Just look at new publicly owned companies in the telecommunications and utility sectors.

Q : Will they be spending on corporate image campaigns?A : Exactly. Phone companies now are competing fiercely. They must advertise to duke it out.

Q : What else appeals in the U.K.?A : Two retailers of consumer durables. Both have dividend yields equal to almost twice their price/earnings ratios, which just shows how cheap they are. At 225 pence a share,
Carpetright
sells at six times normalized earnings and yields a safe 12%. It's debt-free. Our target is 565p in 12 months.
DFS Furniture
recently traded at 188p, where it yielded 10%, against a 52-week high of 587. Our target is 350.

Q : One more.A :
Fila Holding
is an Italian-based maker of sports footwear and apparel that is traded only in New York. It's majority-owned by a very strong Italian company, HDP, that's loosely affiliated with the Fiat group. This is both a turnaround story and a cyclical bet on athletic wear, which has been in a down cycle for 18 months. The U.S. is Fila's biggest market. Under new management here, it's restructuring, getting out of retailing and focusing on what it does best -- design, manufacture and distribute. It's going back to basics, and is sponsoring prestige sporting events like tennis tournaments. Fila enjoys a very strong brand image in Europe, Asia and Latin America. There's a huge short-interest position in the stock, which traded at 105 a share in 1996 and as low as 7 1/8 last month. The shorts don't seem to realize that Fila won't go broke. Its parent guarantees its debt. It will report a big loss for 1998, maybe $4.30 a share, but could break even in '99 and earn about $1 a share in 2000. Normalized earnings are about $2.25-$2.50 a share. From 8 3/4 recently, our target is 35.

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